In a world of highly integrated global supply chains, Donald Trump’s tariff policy has upended business as usual for just about everyone. While most companies say that the tariff policy will be harmful due to higher costs of both intermediate products and end products, at least one company sees the new tariff policy as being beneficial. That company, MP Materials, says that as the only mine in the United States producing and processing certain rare earth minerals, business is booming. Rare earth minerals, or rare earths, are a collection of elements including for example, Neodymium and Lutetium, that are used in the production of everything from fighter jets to medical devices and smart phones. Much of the world’s supply and processing of rare earths is under the control of China, and therefore subject to the punishing tariffs levied by Donald Trump on goods from China. Those tariffs could raise prices of rare earths by 125 percent or more. (The confusion lies with a lack of clarity in just how the tariffs are being imposed.) Regardless of which number you use, the impact of a significantly higher price is very real.
For MP Materials, this means a sudden surge in demand as U.S. companies seek lower cost inputs. In normal times, the cost of mining and processing the rare earths in the United States is too high to justify the investment, which explains why MP Materials has not faced any domestic competition for its rare earths. Even MP Materials usually ships ore to China for processing because it’s more cost efficient than doing it at home. Now, given the tariffs, MP Materials is committing to processing about 50 percent of what would normally be sent to China, thereby giving domestic buyers an opportunity to source the resources they need at a lower price. However, that price is still higher than what it used to cost to import the resources from China. Now, there is growing concerns that China could use its control over rare earths as a negotiating tool with the United States. A long-term restriction on exports would change the equation on investing in domestic processing capabilities, which are currently inadequate, but it would still mean higher prices for companies and consumers. While the White House has explored other sources of rare earth minerals, such as accessing them from Greenland and Ukraine, so far, those efforts have been unsuccessful, leaving China with the upper hand and buyers with higher prices.
Discussion Questions:
1. Consider the role of free trade as it relates to demand for resources like rare earth materials. Does it make sense to produce those resources domestically if countries like China can make them more efficiently and more cheaply?
2. Rare earths are, in reality, somewhat readily available. The cost of extracting them, however, can be relatively high given the investment required. Does it make sense for governments to ensure domestic supplies of these resources even if doing so means higher prices for end users?
Sources| Ap News: https://apnews.com/article/rare-earths-trump-tariffs-china-trade-war-effd6a7ec64b5830df9d3c76ab9b607a; YouTube: https://www.youtube.com/watch?v=T5mgi0HqNQo; BBC UK: https://www.bbc.co.uk/news/articles/c1drqeev36qo; Unsplash: Photo by A. C. on Unsplash